Obama’s healthcare plans are enduring a slow and painful birth.The President himself has claimed that parties are in ‘broad agreement’ over his proposal to inject a public player into the US healthcare insurance market, but congressional committees are apparently still debating how to structure and fund the scheme.

We have written on this blog before about the potential value of a public sector player in a mixed market – and in this case the government option proposed by Obama has potential to pull down costs for the consumer (see this excellent New Yorker article for info), and set a bar in terms of quality and access.As Paul Krugman spells out today, a wholly private market has the potential to skew incentives away from user interests:

“The key thing you need to know about health care is that it depends crucially on insurance. You don’t know when or whether you’ll need treatment — but if you do, treatment can be extremely expensive,well beyond what most people can pay out of pocket. Triple coronary bypasses, not routine doctor’s visits, are where the real money is, so insurance is essential.

…Yet private markets for health insurance, left to their own devices, work very badly: insurers deny as many claims as possible, and they also try to avoid covering people who are likely to need care.”

It is easy to see why those with a vested interest have spoken out against the scheme, but some on the American right are also arguing from an ideological perspective – that a free (or rather unregulated) market is preferable, and it is actually Medicare and Medicaid that have contributed most to escalating costs.

This is fair enough, but arguing for less regulation in the aftermath of the banking crisis seems a bit foolish.What Obama has developed is a plan that is fundamentally market-friendly, and there is little evidence that a truly free market for healthcare would work anyway.As Krugman argues:

“To the extent we have a working health care system at all right now it’s only because the government covers the elderly, while a combination of regulation and tax subsidies makes it possible for many, but not all, nonelderly Americans to get decent private coverage.”

Policymakers in this country will be eyeing the debate carefully, and especially because real limits on public spending may ultimately be the catalyst for more diverse means of providing public services.Despite being played out on fundamentally different terrain, the US healthcare debate shows that getting the right mix of providers and incentives – and thus being careful about market design and regulation – will be key skills for any future government.

Today’s Wall Street Journal carries an opinion piece by Robert Reich on the progress (or otherwise) of Obama’s health care reform plan through Congress.Ive been meaning to write about this for a while, and this mornings article prompted me into action….

Obama is effectively trying to re-model a system by inserting a public player into an already (mis)functioning market.The problem is essentially two-pronged: first, lots of Americans (Reuters estimates 47 million) do not have access to health insurance; and second, the cost of the existing private insurance system is both expensive and variable.A lengthy article in the New Yorker recently set out the issues at stake here.

So Obama’s intention is to establish a public insurance plan.This would compete with private providers, providing a new cost and quality bar for private competitors.The American public would theoretically then be able to purchase their medical insurance from a truly competitive (and thus better value-for-money) marketplace.

This sounds like a good plan.As Reich suggests, it is driven by tinkering with the incentives that underpin the private insurance market.Currently, these are quite self-serving, resulting in a steady increase in costs for the consumer.Reich contests that “those opposed to public opinion should ask how private plans can ever compete (with the public option).The answer is they can and they should.It’s the only way we have a prayer of taming health-care costs.”

There are other benefits to establishing a public player within a mixed market like this (as I argued in a New Statesman piece a couple of months back).As well as potentially reducing entry costs to health insurance, access to the information that a public provider will generate can help re-configure a market around new measures of quality and outcomes.

The obvious question hanging over all of this is cost.How will a public plan be paid for?And where will the burden fall in terms of potential tax rises?

According to Reich, “no one wants to raise taxes or even be accused of thinking about the subject. But honest politicians have to admit that universal health care will require additional revenues. The likeliest sources are limits on certain tax deductions and a cap on tax-free employer-provided health care.”So for the plan to be realized, the Obama administration will have to annoy the pharmaceutical giants, US employers and the middle classes.Good luck.

Whilst we observe this debate from afar, we should recognize that this is a living, breathing example of the ‘hard choices’ spoken about so often – by politicians, and by thinktanks like ourselves.We should all watch with interest, and hope that a progressive approach in this case can set the benchmark for creative reform in other areas.